SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 40690 / November 19, 1998
Admin. Proc. File No. 3-9510
__________________________________________________
:
In the Matter of the Application of :
:
RUSSELL A. SIMPSON :
49 Elizabeth Road :
Belmont, MA 02178-3819 :
:
For Review of Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
__________________________________________________:
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF
ASSOCIATION ACTION
Jurisdiction to Review Action of Association
Customer's disciplinary complaint against member firm of
registered securities association and associated person,
contending that firm and associated person had violated
association rules, was dismissed by association after
conclusion of proceedings in which no violation was found.
Held, the matter is not reviewable by the Commission because
the dismissal of such a complaint is not among the actions
enumerated in Section 19(d) of the Securities Exchange Act
of 1934, 15 U.S.C. 78s(d), and application for review is
dismissed.
APPEARANCES:
Russell A. Simpson, pro se.
Alden S. Adkins, Norman Sue, Jr., and Susan L. Beesley, for
NASD Regulation, Inc.
Peter W. Schneider and Kevin E. Broyles, of Rogers & Hardin,
for Pierre M. Koutani and Bear, Stearns & Co. Inc.
Appeal lodged: December 11, 1997
Last brief received: March 30, 1998
I.
Russell A. Simpson, a former customer of Bear, Stearns & Co.
Inc. ("Bear Stearns"), a member firm of the National Association
of Securities Dealers, Inc. ("NASD"), seeks review of NASD
action. The NASD dismissed a complaint filed by Simpson against
Bear Stearns and Pierre Koutani, formerly a registered
representative with Bear Stearns who handled Simpson's account.
Simpson contends both that Bear Stearns and Koutani violated NASD
rules, and that the NASD and its subsidiary NASD Regulation, Inc.
("NASDR") failed to enforce those rules. [1] As discussed below,
we conclude that we do not have jurisdiction under Section
19(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act"),
15 U.S.C. 78s(d)(2), to review this matter. [2]
II.
At the time of the events at issue, Article IV, Section 2 of
the NASD Rules of Fair Practice provided that any person feeling
aggrieved by an act of an NASD member or associated person that
he or she believed to be in violation of those rules could file a
complaint, using a form to be supplied by the Board of Governors,
and that any such complaint would be handled in accordance with
the NASD Code of Procedure. Article IV, Section 2 subsequently
became NASD Rule 8120. Rule 8120 was eliminated in 1997 when the
Commission approved new rules governing the NASD disciplinary
process. [3]
On April 10, 1994, Simpson wrote to the NASD's District
Business Committee for District Number 7 (the "District
Committee"), identifying his letter as "a formal complaint under
Article IV, Section 2 of the NASD Rules of Fair Practice" against
Bear Stearns and Koutani. Simpson asserted that Bear Stearns and
Koutani had violated the NASD Rules of Fair Practice in
connection with securities transactions in October and November
1993. He contended that Koutani had misrepresented the
price/earnings ratio of a stock that Koutani had recommended;
that Bear Stearns and Koutani had recommended the purchase and
subsequent sale of that stock to him without any reasonable
grounds for believing that those recommendations were suitable;
and that Bear Stearns and Koutani had not given proper notice
that, as a market maker in that stock, it was the seller of the
shares Simpson purchased and the repurchaser of the shares he
later sold.
Although Simpson indicated that he intended his letter as a
formal complaint, he did not, as the rule required, use the form
provided for such complaints. The District Committee therefore
did not treat the letter as a formal complaint. Rather, the
District Committee considered it in accordance with former
Article I, Section 4 of the NASD Code of Procedure, which
provided that communications received from any person regarding
any grievance against an NASD member or associated person "may be
dealt with by the [NASD] as it considers to be fair and proper
under the circumstances." [4] After an investigation, the NASD
staff determined that no disciplinary action was warranted.
Simpson expressed dissatisfaction with this outcome, and an
examination subcommittee of the District Committee then reviewed
the staff's report of investigation and determined to take no
further action.
Still dissatisfied, Simpson filed a formal complaint against
Bear Stearns and Koutani. Simpson conducted the prosecution of
the complaint. After a hearing at which four witnesses testified
and more than 60 exhibits were introduced into evidence, the
District Committee found that Simpson failed to sustain his
burden of proof as to any of the violations. It therefore
dismissed the complaint.
Simpson appealed the District Committee's dismissal to the
National Business Conduct Committee ("National Committee").
Following a hearing, the National Committee instructed the
District Committee to clarify its findings as to one of the three
causes alleged in the complaint, and retained jurisdiction over
the entire matter pending receipt of that clarification. The
National Committee found that the first District Committee
response was inadequate and ordered further clarification. After
receiving this additional clarification from the District
Committee and reviewing the record and the arguments made on
appeal, the National Committee affirmed the dismissal of
Simpson's complaint in its entirety. Simpson then sought our
review.
III.
Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1),
requires, among other things, that the NASD file notice with the
Commission of any action by which it: (1) imposes any final
disciplinary sanction on any member or person associated with a
member; (2) denies membership or participation to an applicant;
(3) prohibits or limits any person in respect to access to
services offered by the NASD or an NASD member; or (4) bars any
person from becoming associated with a member. Exchange Act
Section 19(d)(2) authorizes our review of any action as to which
notice is required to be filed with us under Section 19(d)(1) on
our own motion or upon application of any person aggrieved
thereby. [5] Although we have not previously considered whether
we can review actions in which a formal complaint brought by
a customer was dismissed by the NASD with no finding of
violation, [6] we have considered the extent of Commission
jurisdiction to hear appeals from other types of actions by self-
regulatory organizations ("SROs") such as the NASD. Based on
those earlier rulings, we conclude that we do not have
jurisdiction here under Section 19(d).
A. This is not an action in which the NASD imposed a "final
disciplinary sanction." We have previously defined a
disciplinary action as an action that responds to an alleged
violation of an SRO rule or Commission statute or rule,
or an action in which a punishment or sanction is sought or
intended. [7] Under this definition, the proceeding initiated by
Simpson's complaint was unquestionably disciplinary in nature:
it was held in response to Simpson's allegations that NASD rules
had been violated, and Simpson asked that Koutani and Bear
Stearns be sanctioned. Section 19(d) does not, however, grant
us jurisdiction to review disciplinary actions generally, but
only over those in which a final disciplinary sanction is
imposed. Here, the NASD imposed no sanction; indeed, it found no
violation on which a sanction could be based.
Simpson relies on Rule 19d-1(c)(1), 17 C.F.R.
240.19d-1(c)(1), which requires SROs to report to us "any final
disciplinary action" that "after notice and opportunity for
hearing, results in any final disposition of charges of: (1) one
or more violations of (A) the rules of [an SRO]." Because this
proceeding resulted in final disposition of charges of violations
of rules of an SRO, he contends that we have jurisdiction to
review it.
Simpson's reliance on this rule, however, is misplaced.
Rule 19d-1(c)(1) requires that dismissals of disciplinary actions
be reported to us so that we may more effectively carry out our
responsibilities for oversight of the SROs. [8] The rule does
not expand our review jurisdiction under Section 19(d), which
allows appeals only where disciplinary actions result in
imposition of final disciplinary sanctions. [9]
B. We also conclude that the NASD's action did not prohibit
or limit Simpson in respect to access to services offered by the
NASD. [10] Simpson's interaction with the NASD was through his
involvement in seeking disciplinary action against Koutani and
Bear Stearns. We do not view permitting any person to file a
complaint against an NASD member or associated person and
conducting any resulting proceeding as offering a "service" for
purposes of Section 19(d). [11]
Even if the NASD were deemed to be offering a service under
Section 19(d), however, it did not limit or prohibit Simpson's
access to that service. Simpson's informal complaint was
investigated and considered by NASD staff, and the staff's
recommendation was then reviewed by the District Committee. His
formal complaint was given full consideration: a hearing before
the District Committee, an appeal to the National Committee, and
two remands to the District Committee for clarification before
the issuance of the National Committee decision.
C. The remaining two prongs of Section 19(d) are easily
dealt with. Simpson did not apply for membership in the NASD,
nor did he seek to become associated with a member. Questions of
denial of membership or bar from association are therefore not
raised.
IV.
A. As an alternative to Section 19(d), Simpson asks us to
review the NASD's decision on our own initiative under Rule 400,
421, or 430 of our Rules of Practice, 17 C.F.R. 201.400,
201.421, or 201.430. None of these rules is applicable. Rule
400 pertains to the interlocutory review of rulings of hearing
officers, and Rule 430 provides for our review of actions taken
pursuant to authority delegated to Commission staff in 17 C.F.R.
200.30-1 through 200.30-18. Neither of these applies to our
review of SRO proceedings.
Rule 421 allows us to review on our own initiative any
determination by an SRO that could be subject to an application
for review under Rule 420. But the SRO determinations to which
Rule 420 applies are those enumerated in Section 19(d)(1), and as
discussed above, the NASD's action here does not fall within that
section.
B. Simpson contends that there were numerous "abuses" in
the way the NASD and NASDR handled his complaints. Because
19(d) gives us no jurisdiction over this review proceeding,
however, we cannot consider Simpson's procedural issues in this
context. [12]
**FOOTNOTES**
[1]: Simpson states that "[i]t is not the purpose of this
application for review to seek disciplinary sanctions"
against Bear Stearns and Koutani. Rather, he claims that he
wishes us to find that Bear Stearns and Koutani violated the
NASD's rules.
[2]:As an initial matter, Bear Stearns and Koutani have
filed a motion for leave to file a Brief in Opposition to
Simpson's Application for Review. Bear Stearns and Koutani
contend that they have a high degree of interest in this
proceeding, since they would be affected by its outcome.
They contend that it would be unfair to deny them the
opportunity to defend themselves. Simpson does not oppose
the motion.
As discussed below, after an evidentiary hearing and an
appeal, the NASD found that Simpson failed to establish
that Koutani and Bear Stearns had violated NASD rules as
alleged in his complaint. It therefore dismissed the
complaint, and Simpson sought our review. The parties to
this review proceeding are thus Simpson, as applicant,
and the NASD. Under Rule 210(f) of our Rules of Practice,
17 C.F.R. 201.210(f), however, we may allow a non-party to
participate on a limited basis in a proceeding to review a
determination by a self-regulatory organization if we deem
it necessary or appropriate in the public interest. We deem
it appropriate to allow Bear Stearns and Koutani to
participate by filing their brief.
[3]:In light of the rule amendments, which included
implementing staff-initiated disciplinary proceedings,
enhancing the arbitration process, and instituting an
expanded and independent NASD internal review function, this
Commission agreed with the NASD that it was no longer
necessary to accord aggrieved persons the right to invoke
NASD processes to initiate formal disciplinary actions. See
Exchange Act Rel. No. 38908 (August 7, 1997), 62 Fed. Reg.
43,385, 43,401 (1997).
[4]:Article I, Section 4 subsequently became NASD Rule 9111,
and was later eliminated.
[5]:Because we conclude that we lack jurisdiction, we do not
reach the question whether Simpson was "aggrieved" within
the meaning of Section 19(d)(2). See Daniel M. Pecoraro, 48
S.E.C. 875, 875 n.1 (1987) (dismissing appeal of entity
against whom no findings were made and on whom no sanctions
were imposed, on grounds that it was not "aggrieved").
[6]:We have exercised review jurisdiction over appeals from
NASD disciplinary actions initiated by customer complaints
where those actions resulted in findings of violation and
the imposition of final disciplinary sanctions. In each of
those instances, the appeal was filed by the person
disciplined. See Stephen Investment Securities, Inc., 51
S.E.C. 604 (1993), aff'd, Stephen Investment Secs., Inc. v.
SEC, 27 F.3d 339 (8th Cir. 1994); E.F. Hutton & Co. Inc., 49
S.E.C. 829 (1988).
[7]:Pacific Stock Exchange's Options Floor Post X-17, 51
S.E.C. 261, 266 (1992).
[8]:See Exchange Act Rel. No. 13726 (July 8, 1977), 12 SEC
Docket 1107, 1111 (noting that reports of dismissals "have
been demonstrably valuable to the Commission in overseeing
NASD regulatory performance"). Reports of dismissals are
required pursuant to the Commission's power under Section
17(a) of the Exchange Act, 15 U.S.C. 78q(a). Id., 12 SEC
Docket at 1111 n.5.
[9]:We noted the distinction between the scope of Section
19(d)(1) and the scope of Rule 19d-1 when we adopted Rule
19d-1: "While Section 19(d)(1) of the [Exchange] Act
appears to require the SRO to report only proceedings in
which sanctions were imposed, Rule 19d-1 requires SRO's to
file notices of both the imposition of sanctions as well as
the dismissal of charges." Id., 12 SEC Docket at 1111. We
further noted that, because Section 19(d)(1) did not mandate
all the reports that our oversight responsibilities
required, it was necessary to include the concept of
"disciplinary actions" in Rule 19d-1 to ensure that we would
obtain information about dismissals, among other things.
Id., 12 SEC Docket at 1111 n.5.
[10]:Although Section 19(d) also gives us jurisdiction over
NASD actions involving limitations on access to services
offered by NASD members, access to services offered by Bear
Stearns is not an issue here.
[11]:See William J. Higgins and Michael D. Robbins, 48
S.E.C. 713, 718 (1987) (finding that denial of request to
install telephone link-ups on trading floor to permit
communication between floor and non-members was denial of
access to services); see also Morgan Stanley, Exchange Act
Rel. No. 39459 (December 17, 1997), 66 SEC Docket 351, 356-
57 (reviewing cases in which denial of access to services
was found).
[12]:Simpson also urges us to institute proceedings against the
NASD and/or NASDR based on what he terms their failure to
enforce the NASD's rules. Our decision whether to institute
such proceedings is a separate matter from our disposition
of this review proceeding.
V.
For the reasons discussed above, we have concluded that the
NASD's decision to dismiss Simpson's complaint is not reviewable
by this Commission under the Exchange Act. We accordingly
dismiss Simpson's application.
An appropriate order will issue. [13]
By the Commission (Chairman LEVITT and Commissioners
JOHNSON, HUNT, CAREY and UNGER).
Jonathan G. Katz
Secretary
**FOOTNOTES**
[13]:Because we lack review jurisdiction, we do not consider the
merits of Simpson's allegations of rule violations. We have
considered all the arguments for and against jurisdiction
advanced in the briefs. They are rejected or sustained to
the extent that they are inconsistent or in accord with the
views expressed herein.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 40690/ November 19, 1998
Admin. Proc. File No. 3-9510
__________________________________________________
:
In the Matter of the Application of :
:
RUSSELL A. SIMPSON :
49 Elizabeth Road :
Belmont, MA 02178-3819 :
:
For Review of Action Taken by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. :
__________________________________________________:
ORDER DISMISSING APPLICATION FOR REVIEW
On the basis of the Commission's opinion issued this day it
is
ORDERED, pursuant to Rule 210(f) of the Rules of Practice,
that the Brief of Interested Parties Bear, Stearns & Co. Inc. and
Pierre M. Koutani in Opposition to Application for Review of
Action taken by the National Association of Securities Dealers,
Inc. be accepted for filing, and it is further
ORDERED that the application of Russell A. Simpson for
review of action taken by the National Association of Securities
Dealers be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
Secretary